U.S. Code > Appendix to Title 46 > CHAPTER 27—MERCHANT MARINE ACT, 1936 (§§ 1101—1295g) > SUBCHAPTER XI—FEDERAL SHIP MORTGAGE INSURANCE (§§ 1271—1280b) > § 1274. Eligibility for guarantee

§ 1274. Eligibility for guarantee

(a) Purpose of obligations
Pursuant to the authority granted under section 1273 (a) of this Appendix, the Secretary or Administrator, upon such terms as he shall prescribe, may guarantee or make a commitment to guarantee, payment of the principal of and interest on an obligation which aids in—
(1) financing, including reimbursement of an obligor for expenditures previously made for, construction, reconstruction, or reconditioning of a vessel (including an eligible export vessel), which is designed principally for research, or for commercial use
(A) in the coastwise or intercoastal trade;
(B) on the Great Lakes, or on bays, sounds, rivers, harbors, or inland lakes of the United States;
(C) in foreign trade as defined in section 1244 of this Appendix for purposes of subchapter V of this chapter; or
(D) as an ocean thermal energy conversion facility or plantship;
(E) with respect to floating drydocks in the construction, reconstruction, reconditioning, or repair of vessels; or
(F) with respect to an eligible export vessel, in world-wide trade; [1] Provided, however, That no guarantee shall be entered into pursuant to this paragraph (a)(1) later than one year after delivery, or redelivery in the case of reconstruction or reconditioning of any such vessel unless the proceeds of the obligation are used to finance the construction, reconstruction, or reconditioning of a vessel or vessels, or facilities or equipment pertaining to marine operations;
(2) financing, including reimbursement of an obligor for expenditures previously made for, construction, reconstruction, reconditioning, or purchase of a vessel or vessels owned by citizens or nationals of the United States or citizens of the Northern Mariana Islands which are designed principally for research, or for commercial use in the fishing trade or industry;
(3) financing the purchase, reconstruction, or reconditioning of vessels or fishery facilities for which obligations were guaranteed under this subchapter that, under the provisions of section 1275 of this Appendix:
(A) are vessels or fishery facilities for which obligations were accelerated and paid;
(B) were acquired by the Fund; or
(C) were sold at foreclosure instituted by the Secretary or Administrator;
(4) financing, in whole or in part, the repayment to the United States of any amount of construction-differential subsidy paid with respect to a vessel pursuant to subchapter V of this chapter;
(5) refinancing existing obligations issued for one of the purposes specified in (1), (2), (3), or (4) whether or not guaranteed under this subchapter, including, but not limited to, short-term obligations incurred for the purpose of obtaining temporary funds with the view to refinancing from time to time;
(6) financing or refinancing, including, but not limited to, the reimbursement of obligors for expenditures previously made for, the construction, reconstruction, reconditioning, or purchase of fishery facilities; or
(7) financing or refinancing, including, but not limited to, the reimbursement of obligors for expenditures previously made, for the purchase of individual fishing quotas in accordance with section 1853 (d)(4) of title 16.
Any obligation guaranteed under paragraphs (6) and (7) shall be treated, for purposes of this subchapter in the same manner and to the same extent as an obligation guaranteed under this subchapter which aids in the construction, reconstruction, reconditioning, or purchase of a vessel; except with respect to provisions of this subchapter that by their nature can only be applied to vessels.
(b) Contents of obligations
Obligations guaranteed under this subchapter—
(1) shall have an obligor approved by the Secretary or Administrator as responsible and possessing the ability, experience, financial resources, and other qualifications necessary to the adequate operation and maintenance of the vessel or vessels which serve as security for the guarantee of the Secretary or Administrator;
(2) subject to the provisions of subsection (c)(1) of this section and subsection (i) of this section, shall be in an aggregate principal amount which does not exceed 75 per centum of the actual cost or depreciated actual cost, as determined by the Secretary or Administrator, of the vessel which is used as security for the guarantee of the Secretary or Administrator: Provided, however, That in the case of a vessel, the size and speed of which are approved by the Secretary or Administrator; and which is or would have been eligible for mortgage aid for construction under section 1159 of this Appendix (or would have been eligible for mortgage aid under section 1159 of this Appendix except that the vessel was built with the aid of construction-differential subsidy and said subsidy has been repaid) and in respect of which the minimum downpayment by the mortgagor required by that section would be or would have been 121/2 per centum of the cost of such vessel, such obligations may be in an amount which does not exceed 871/2 per centum of such actual cost or depreciated actual cost: Provided, further, That the obligations which relate to a barge which is constructed without the aid of construction-differential subsidy, or, if so subsidized, on which said subsidy has been repaid, may be in an aggregate principal amount which does not exceed 871/2 per centum of the actual cost or depreciated actual cost thereof: Provided further, That in the case of a fishing vessel or fishery facility, the obligation shall be in an aggregate principal amount not to exceed 80 percent of the actual cost or depreciated actual cost of the fishing vessel or fishery facility, except that no debt may be placed under this proviso through the Federal Financing Bank: Provided further, That in the case of an ocean thermal energy conversion facility or plantship which is constructed without the aid of construction-differential subsidy, such obligations may be in an aggregate principal amount which does not exceed 871/2 percent of the actual cost or depreciated actual cost of the facility or plantship: Provided further, That in the case of an eligible export vessel, such obligations may be in an aggregate principal amount which does not exceed 871/2 of the actual cost or depreciated actual cost of the eligible export vessel;
(3) shall have maturity dates satisfactory to the Secretary or Administrator but, subject to the provisions of paragraph (2) of subsection (c) of this section, not to exceed twenty-five years from the date of the delivery of the vessel which serves as security for the guarantee of the Secretary or Administrator or, if the vessel has been reconstructed or reconditioned, not to exceed the later of
(i) twenty-five years from the date of delivery of the vessel and
(ii) the remaining years of the useful life of the vessel as determined by the Secretary or Administrator;
(4) shall provide for payments by the obligor satisfactory to the Secretary or Administrator;
(5) shall bear interest (exclusive of charges for the guarantee and service charges, if any) at rates not to exceed such per centum per annum on the unpaid principal as the Secretary or Administrator determines to be reasonable, taking into account the range of interest rates prevailing in the private market for similar loans and the risks assumed by the Secretary or Administrator;
(6) shall provide, or a related agreement shall provide, that if the vessel used as security for the guarantee of the Secretary or Administrator is a delivered vessel, the vessel shall be in class A–1, American Bureau of Shipping, or shall meet such other standards as may be acceptable to the Secretary or Administrator, with all required certificates, including but not limited to, marine inspection certificates of the United States Coast Guard or, in the case of an eligible export vessel, of the appropriate national flag authorities under a treaty, convention, or other international agreement to which the United States is a party, with all outstanding requirements and recommendations necessary for retention of class accomplished, unless the Secretary or Administrator permits a deferment of such repairs, and shall be tight, stanch, strong, and well and sufficiently tackled, appareled, furnished, and equipped, and in every respect seaworthy and in good running condition and repair, and in all respects fit for service; and
(7) may provide, or a related agreement may provide, if the vessel used as security for the guarantee of the Administrator is a passenger vessel having the tonnage, speed, passenger accommodations and other characteristics set forth in subchapter V of this chapter, and if the Administrator approves, that the sole recourse against the obligor by the United States for any payments under the guarantee shall be limited to repossession of the vessel and the assignment of insurance claims and that the liability of the obligor for any payments of principal and interest under the guarantee shall be satisfied and discharged by the surrender of the vessel and all right, title, and interest therein to the United States: Provided, That the vessel upon surrender shall be
(i) free and clear of all liens and encumbrances whatsoever except the security interest conveyed to the Administrator under this subchapter,
(ii) in class, and
(iii) in as good order and condition, ordinary wear and tear excepted, as when acquired by the obligor, except that any deficiencies with respect to freedom from encumbrances, condition and class may, to the extent covered by valid policies of insurance, be satisfied by the assignment to the Administrator of claims of the obligor under such policies.
The Secretary may not establish, as a condition of eligibility for guarantee under this subchapter, a minimum principal amount for an obligation covering the reconstruction or reconditioning of a fishing vessel or fishery facility. For purposes of this subchapter, the reconstruction or reconditioning of a fishing vessel or fishery facility does not include the routine minor repair of maintenance of the vessel or facility.
(c) Security
(1) The security for the guarantee of an obligation by the Secretary or Administrator under this subchapter may relate to more than one vessel and may consist of any combination of types of security. The aggregate principal amount of obligations which have more than one vessel as security for the guarantee of the Secretary or Administrator under this subchapter may equal, but not exceed, the sum of the principal amount of obligations permissible with respect to each vessel.
(2) If the security for the guarantee of an obligation by the Secretary or Administrator under this subchapter relates to more than one vessel, such obligation may have the latest maturity date permissible under subsection (b) of this section with respect to any of such vessels: Provided, That the Secretary or Administrator may require such payments of principal, prior to maturity, with respect to all related obligations as he deems necessary in order to maintain adequate security for his guarantee.
(d) Restrictions
(1)
(A) No commitment to guarantee, or guarantee of, an obligation shall be made by the Administrator unless the Administrator finds that the property or project with respect to which the obligation will be executed will be economically sound. In making that determination, the Administrator shall consider—
(i) the need in the particular segment of the maritime industry for new or additional capacity, including any impact on existing equipment for which a guarantee under this subchapter is in effect;
(ii) the market potential for the employment of the vessel over the life of the guarantee;
(iii) projected revenues and expenses associated with employment of the vessel;
(iv) any charters, contracts of affreightment, transportation agreements, or similar agreements or undertakings relevant to the employment of the vessel;
(v) other relevant criteria; and
(vi) for inland waterways, the need for technical improvements, including but not limited to increased fuel efficiency, or improved safety.
(B) No commitment to guarantee, or guarantee of, an obligation shall be made by the Secretary of Commerce unless the Secretary finds, at or prior to the time such commitment is made or guarantee becomes effective, that the property or project with respect to which the obligation will be executed will be, in the Secretary’s opinion, economically sound and in the case of fishing vessels, that the purpose of the financing or refinancing is consistent with the wise use of the fisheries resources and with the development, advancement, management, conservation, and protection of the fisheries resources, or with the need for technical improvements including but not limited to increased fuel efficiency or improved safety.
(2) No commitment to guarantee, or guarantee of an obligation may be made by the Secretary under this subchapter for the purchase of a used fishing vessel or used fishery facility unless—
(A) the vessel or facility will be reconstructed or reconditioned in the United States and will contribute to the development of the United States fishing industry; or
(B) the vessel or facility will be used in the harvesting of fish from, or for a purpose described in section 1271 (k) of this Appendix with respect to, an underutilized fishery.
(3) No commitment to guarantee, or guarantee of an obligation may be made by the Administrator or Administrator [2] under this subchapter for the construction, reconstruction, or reconditioning of an eligible export vessel unless—
(A) the Administrator or Administrator [2] finds that the construction, reconstruction, or reconditioning of that vessel will aid in the transition of United States shipyards to commercial activities or will preserve shipbuilding assets that would be essential in time of war or national emergency, and
(B) the owner of the vessel agrees with the Administrator that the vessel shall not be transferred to any country designated by the Secretary of Defense as a country whose interests are hostile to the interests of the United States.
(4) The Secretary shall promulgate regulations concerning circumstances under which waivers of or exceptions to otherwise applicable regulatory requirements concerning financial condition can be made. The regulations shall require that—
(A) the economic soundness requirements set forth in paragraph (1)(A) of this subsection are met after the waiver of the financial condition requirement; and
(B) if deemed necessary by the Secretary or Administrator, the waiver shall provide for the imposition of other requirements on the obligor designed to compensate for any significant increase in risk associated with the obligor’s failure to meet regulatory requirements applicable to financial condition.
(e) Guarantee fees
(1) Except as otherwise provided in this subsection, the Secretary or Administrator shall prescribe regulations to assess in accordance with this subsection a fee for the guarantee of an obligation under this subchapter.
(2)
(A) The amount of a fee under this subsection for a guarantee is equal to the sum determined by adding the amounts determined under subparagraph (B) for the years in which the guarantee is in effect.
(B) The amount referred to in subparagraph (A) for a year is the present value (determined by applying the discount rate determined under subparagraph (F)) of the amount determined by multiplying—
(i) the estimated average unpaid principal amount of the obligation that will be outstanding during the year (determined in accordance with subparagraph (E)), by
(ii) the fee rate established under subparagraph (C) for the obligation for each year.
(C) The fee rate referred to in subparagraph (B)(ii) for an obligation shall be—
(i) in the case of an obligation for a delivered vessel or equipment, not less than one-half of 1 percent and not more than 1 percent, determined by the Secretary or Administrator for the obligation under the formula established under subparagraph (D); or
(ii) in the case of an obligation for a vessel to be constructed, reconstructed, or reconditioned, or of equipment to be delivered, not less than one-quarter of 1 percent and not more than one-half of 1 percent, determined by the Secretary or Administrator for the obligation under the formula established under subparagraph (D).
(D) The Secretary or Administrator shall establish a formula for determining the fee rate for an obligation for purposes of subparagraph (C), that—
(i) is a sliding scale based on the creditworthiness of the obligor;
(ii) takes into account the security provided for a guarantee under this subchapter for the obligation; and
(iii) uses—
(I) in the case of the most creditworthy obligors, the lowest rate authorized under subparagraph (C)(i) or (ii), as applicable; and
(II) in the case of the least creditworthy obligors, the highest rate authorized under subparagraph (C)(i) or (ii), as applicable.
(E) For purposes of subparagraph (B)(i), the estimated average unpaid principal amount does not include the average amount (except interest) on deposit in a year in the escrow fund under section 1279a of this Appendix.
(F) For purposes of determining present value under subparagraph (B) for an obligation, the Secretary or Administrator shall apply a discount rate determined by the Secretary of the Treasury taking into consideration current market yields on outstanding obligations of the United States having periods to maturity comparable to the period to maturity for the obligation with respect to which the determination of present value is made.
(3) A fee under this subsection shall be assessed and collected not later than the date on which amounts are first paid under an obligation with respect to which the fee is assessed.
(4) A fee paid under this subsection is not refundable. However, an obligor shall receive credit for the amount paid for the remaining term of the guaranteed obligation if the obligation is refinanced and guaranteed under this subchapter after such refinancing.
(5) A fee paid under subsection (e) of this section shall be included in the amount of the actual cost of the obligation guaranteed under this subchapter and is eligible to be financed under this subchapter.
(f) Investigation of applications
(1) The Secretary or Administrator shall charge and collect from the obligor such amounts as he may deem reasonable for the investigation of applications for a guarantee, for the appraisal of properties offered as security for a guarantee, for the issuance of commitments, for services in connection with the escrow fund authorized by section 1279a of this Appendix and for the inspection of such properties during construction, reconstruction, or reconditioning: Provided, That such charges shall not aggregate more than one-half of 1 per centum of the original principal amount of the obligations to be guaranteed.
(2) The Secretary or Administrator may make a determination that aspects of an application under this subchapter require independent analysis to be conducted by third party experts due to risk factors associated with markets, technology, or financial structures. Any independent analysis conducted pursuant to this provision shall be performed by a party chosen by the Secretary or Administrator.
(3) Notwithstanding any other provision of this subchapter, the Secretary or Administrator may make a determination that an application under this subchapter requires additional equity because of increased risk factors associated with markets, technology, or financial structures.
(4) The Secretary or Administrator may charge and collect fees to cover the costs of independent analysis under paragraph (2). Notwithstanding section 3302 of title 31, any fee collected under this paragraph shall—
(A) be credit as an offsetting collection to the account that finances the administration of the loan guarantee program;
(B) shall [3] be available for expenditure only to pay the costs of activities and services for which the fee is imposed; and
(C) shall [3] remain available until expended.
(5) A third party independent analysis conducted under paragraph (2) shall be performed by a private sector expert in assessing such risk factors who is selected by the Administrator.
(g) Disposition of moneys
All moneys received by the Secretary or Administrator under the provisions of sections 1271 to 1276 and 1279 [4] of this Appendix shall be deposited in the Fund.
(h) Additional requirements
Obligations guaranteed under this subchapter and agreements relating thereto shall contain such other provisions with respect to the protection of the security interests of the United States (including acceleration, assumption, and subrogation provisions and the issuance of notes by the obligor to the Secretary or Administrator), liens and releases of liens, payments of taxes, and such other matters as the Secretary or Administrator may, in his discretion, prescribe.
(i) Limitation on authority to establish uniform percentage limitations
The Secretary or Administrator may not, with respect to—
(1) the general 75 percent or less limitation in subsection (b)(2) of this section;
(2) the 871/2 percent or less limitation in the 1st, 2nd, 4th, or 5th proviso to subsection (b)(2) of this section or section 1279e (b) of this Appendix; or
(3) the 80 percent or less limitation in the 3rd proviso to such subsection;
establish by rule, regulation, or procedure any percentage within any such limitation that is, or is intended to be, applied uniformly to all guarantees or commitments to guarantee made under this section that are subject to the limitation.
(j) Guarantees for eligible export vessels
(1) Upon receiving an application for a loan guarantee for an eligible export vessel, the Administrator shall promptly provide to the Secretary of Defense notice of the receipt of the application. During the 30-day period beginning on the date on which the Secretary of Defense receives such notice, the Secretary of Defense may disapprove the loan guarantee based on the assessment of the Administrator of the potential use of the vessel in a manner that may cause harm to United States national security interests. The Secretary of Defense may not disapprove a loan guarantee under this section solely on the basis of the type of vessel to be constructed with the loan guarantee. The authority of the Administrator to disapprove a loan guarantee under this section may not be delegated to any official other than a civilian officer of the Department of Defense appointed by the President, by and with the advice and consent of the Senate.
(2) The Administrator may not make a loan guarantee disapproved by the Secretary of Defense under paragraph (1).
(k) Monitoring
The Secretary or Administrator shall monitor the financial conditions and operations of the obligor on a regular basis during the term of the guarantee. The Secretary or Administrator shall document the results of the monitoring on an annual or quarterly basis depending upon the condition of the obligor. If the Secretary or Administrator determines that the financial condition of the obligor warrants additional protections to the Secretary or Administrator, then the Secretary or Administrator shall take appropriate action under subsection (m) of this section. If the Secretary or Administrator determines that the financial condition of the obligor jeopardizes its continued ability to perform its responsibilities in connection with the guarantee of obligations by the Secretary or Administrator, the Secretary or Administrator shall make an immediate determination whether default should take place and whether further measures described in subsection (m) of this section should be taken to protect the interests of the Secretary or Administrator while insuring that program objectives are met.
(l) Review of applications
No commitment to guarantee, or guarantee of, an obligation shall be made by the Secretary or Administrator unless the Secretary or Administrator certifies that a full and fair consideration of all the regulatory requirements, including economic soundness and financial requirements applicable to obligors and related parties, and a thorough assessment of the technical, economic, and financial aspects of the loan application has been made.
(m) Agreement with obligor
The Secretary or Administrator shall include provisions in loan agreements with obligors that provide additional authority to the Secretary or Administrator to take action to limit potential losses in connection with defaulted loans or loans that are in jeopardy due to the deteriorating financial condition of obligors. If the Secretary or Administrator has waived a requirement under subsection (d) of this section, the loan agreement shall include requirements for additional payments, collateral, or equity contributions to meet such waived requirement upon the occurrence of verifiable conditions indicating that the obligor’s financial condition enables the obligor to meet the waived requirement.
(n) Decision period
(1) In general
The Administrator shall approve or deny an application for a loan guarantee under this subchapter within 270 days after the date on which the signed application is received by the Administrator or Administrator.[2]
(2) Extension
Upon request by an applicant, the Administrator or Administrator [2] may extend the 270-day period in paragraph (1) to a date not later than 2 years after the date on which the signed application for the loan guarantee was received by the Administrator or Administrator.[2]

[1] So in original. The semicolon probably should be a colon.

[2] So in original. See 2006 Amendment notes.

[3] So in original. The word “shall” probably should not appear.

[4] See References in Text note below.